The relationship between your student loans and your credit scores has two stages. Applying for students loans, to begin with and then the manner and time how student loans are paid off.
Applying For Student Loans
First, there is getting a student loan or loans for school. While a credit score is not considered when applying for Federal student loans, a poor one (below 650) can stop an application for a private student loan dead in its tracks. Since Federal loans cannot be used for housing or transportation costs, the inability to get a private loan can still prevent some students from attending college. Applicants for Federal loans should also keep in mind that even with a good credit score, a bankruptcy that was applied for within 90 days of filing a FAFSA application will result in it being rejected. If you do not have a credit score at all and are looking to start building your credit score, we have a guide just for you.
If you are concerned about your credit scores, you can always check on them with the three major credit reporting agencies. Before you do that, ask for a copy of your credit report from each of them. According to Federal law, you are allowed a free copy from these agencies each year. If there is information that is false, misleading or happened over a decade ago, then you need to look into having it changed or deleted as soon as you can. One of our own contributors here at Student Debt Relief was once denied an auto loan because he was reported as deceased by one of the credit reporting agencies. It took over three months for him to be ‘resurrected’.
Repaying Student Loans
After graduation, repaying a loan quickly and without missed payments is the best way to build and keep a good credit score. However, even with this simple rule to follow, there are a number of things to be careful of; some of them are going to surprise you.
Paying off your student loan early may actually damage your credit score. Student loans are installment loans which, unlike credit card debt (revolving credit), it does not look better to creditors to have the lowest balance possible. Future creditors understand that a student loan means there is no larger balance of available credit and that your monthly payment will not change over the lifetime of the loan.
Since paying off an installment loan early can mean a loss of income (interest) on the loan to the lender, it may actually send the wrong signal to potential future creditors and lenders. This can mean future loans with a shorter term, but a higher interest rate so they will get a better return on their loan to you.
Delinquency And Deferment
Resolve any delinquency immediately. Although it can harm your credit score to pay off too quickly, the damage will be much worse to just leave a student loan delinquent in the hope that you will find a new job or another source of income in order to “catch up”. Once you resolve a delinquency by establishing an Income Based Repayment, Income Contingent Repayment or another repayment option, your credit rating will quickly begin climbing back to its pre-delinquent level.
Student loans taken out with a private lender have fewer repayment options than a federal student loan. Even so, most banks will work with you to help not just you and your credit score, but to keep “bad” loans off of their books. No bank manager or loan officer wants to have to answer about why a loan is delinquent and have to go through the process of attaching paychecks if they can find a solution agreeable to both parties. The key here is to notify your lender before you miss a payment and to set up a new repayment plan. If it is too late for that, then you will need to establish a new repayment plan quickly and follow up with the lender and the credit reporting agencies to make sure any bad information about it has been updated to show a repayment plan is now in place.
A student loan in deferment or forbearance will NOT hurt your credit score. Payments are not required when a loan is deferred, so you cannot be late in making them. If you need a short term of relief from a student loan to get your finances back on track, or to deal with an unexpected expense such as an extended hospital stay, then this is definitely an option for you.
Good Credit Loans
As mentioned above, student loans are installment loans. They are weighed less against your credit score than other types of loans and much less than credit card debt. This also makes them an excellent way to add history and diversity to the credit score of a new college graduate that might not otherwise have a credit history except for a credit card or two. This is also a loan that is supposed to improve earning potential and not to spend on a luxury item. All of this puts student loans, federal or private, in the category of “good credit”.
Federal Student Loan Advantages
Unlike private lenders, federal student loan lenders do not report past due accounts until they are 60 days past due and even then until the end of that month. This provides a federal student loan holder additional time to pursue repayment options or request deferment for the loan.
When deferment is granted, federal student loan lenders report it to the credit agencies automatically; in some cases, they will even backdate it if appropriate. As an example; if you return to school to pursue another degree, but did not file the appropriate notification paperwork, the period for which your loan was delinquent can be removed from your credit history once everything has been filed correctly.
Compare the Best Student Loan Refinance Rates
Here are our top student loan refinance picks for 2019
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Student Debt Relief Loan Refinancing Advertiser Disclosure
College Ave: College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
College Ave Refi Education loans are not currently available to residents of Maine.
1 – The 0.25% auto-pay interest rate reduction applies as long as the borrower or cosigner, if applicable, enrolls in auto-pay and authorizes our loan servicer to automatically deduct your monthly payments from a valid bank account via Automated Clearing House (“ACH”). The rate reduction applies for as long as the monthly payment amount is successfully deducted from the designated bank account and is suspended during periods of forbearance and certain deferments. Variable rates may increase after consummation.
2 – $5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees. Information advertised valid as of 04/26/2019. Variable interest rates may increase after consummation.
3 – This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
ELFI: Subject to credit approval. Terms and conditions apply. To qualify for refinancing or student loans consolidation through ELFI, you must have at least $15,000 in student loan debt and must have earned a bachelor’s degree or higher from an approved post-secondary institution.
LendKey: Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
CommonBond: Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate.
Splash Financial: Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval.com
Earnest: To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest’s fixed-rate loan rates range from 3.89% APR (with autopay) to 7.89% APR (with autopay). Variable rate loan rates range from 2.50% APR (with autopay) to 7.27% APR (with autopay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms of 10 years or less. For loan terms of 10 to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 0.26% and 5.03% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 23, 2019 and are subject to change based on market conditions and borrower eligibility.
Auto Pay Discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/23/19. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice.
Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 303 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, e-mail us at firstname.lastname@example.org, or call 888-601-2801 for more information on our student loan refinance product.